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The European Financial Reporting Advisory Group, EFRAG for short, recently published in April 2022 a new set of exposure drafts for public consultation as part of the EU Sustainability Reporting Standards (ESRS), in preparation for submission to the European Commission in November 2022. As the technical advisor to the the European Commission, EFRAG is responsible for setting ESG-related reporting standards for the EU, which will be adopted as delegated acts under the Corporate Sustainability Reporting Directive (CSRD).
The ESRS exposure drafts sets out detailed requirements for corporate sustainability reporting. Disclosures fall into four main categories: general, environment, social, and governance. ESRS 1 & 2 are cross-cutting standards that apply to all sectors and industries, providing general guidance for reporting on strategy, governance, and materiality. Exposure drafts on the environment (ESRS E1-E5) encompasses climate change; pollution; water and marine resources; biodiversity and ecosystems; and resource use and circularity. ESRS S1-S4 for social aspects cover the workforce, workers in the value chain, communities, and end-users or consumers. Governance-related matters are covered in ESRS G1 & G2 on governance, risk, and internal control as well as business conduct.
Key disclosure requirements vary for each ESRS depending on the material risk, but generally they include management policies, targets, and action plans on the given ESRS. On the performance side, companies are to follow the specific guidance on measurement as a required disclosure, as well as the financial impacts related to the topic. The coverage is comprehensive, ranging from processes on community engagement and payment practices to references to existing standards such as the EU Taxonomy and the Water Framework Directive 2000/60/EC. The latter ensures some level of framework alignment, setting up the ESRS as a link in the sustainability reporting ecosystem.
The disclosures require reporting on various national- and international-level targets that have been adopted in the EU such as the Post-2020 Global Biodiversity Framework and the EU Biodiversity Strategy for 2030. Where relevant, companies must disclose their transition plans that support high-level commitments, such as those related to climate and biodiversity goals. Included are also optional disclosures such as biodiversity offsets, leaving room for voluntary reporting and a flexibility for different levels of reporting maturity.
The key concept of double materiality holds particular importance for all industries that will be bound to the new standards. The ESRS explicitly requires reporting based on the double materiality principle, where material impacts must be both important financially and impactful to the business or to external stakeholders. Depending on the risk area, companies may have to disclose information on their supply chain, especially for climate change and workers in the value chain.
Companies should update their materiality assessment frameworks based on the double materiality principle and begin the engagement process with their supply chain to increase ESG transparency. Understanding ESRS requirements for each material risk is of course fundamental to compliance.